‘On track’ for a surplus? Not good enough

Temporary deficits have a tendency to become entrenched – just ask the US. If Tony Abbott fails to return the budget to surplus quickly, Australia could face the same fate, writes Chris Berg at The Drum.
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Let’s open up the books at the Reserve Bank

Henry Ford, the American automobile manufacturer, once said that “It is well enough that the people of the nation do not understand our banking and monetary system for, if they did, I believe there would be a revolution before tomorrow morning”, writes Sukrit Sabhlok.

Indeed, if there’s one thing central bankers have been successful at, it’s using obfuscation and jargon so the public finds it difficult to understand what exactly it is they do.

Even when experts try and figure out what central bankers do, a range of legal barriers prevent a complete accounting of their activities. When former Congressman Ron Paul tried to audit the US Federal Reserve System a few years ago, for example, he faced opposition from a range of economists and politicians keen on preserving the Fed’s secrecy.

In Australia, the opaqueness of the Reserve Bank’s discretion doesn’t seem to trouble many people. But it should, because the RBA wields a significant power that influences the level of prices in the economy and consequently affects the hip pocket. The inflation it creates hurts the poor – and if more people knew the RBA was the culprit behind rising prices, and that much of the erosion in purchasing power we have seen over the past 100 years was unnecessary, there is little doubt that there would be protests on the streets.

The RBA’s aversion to scrutiny can be seen in the way that it shies away from the media spotlight, preferring instead to stage-manage the appearances of its officials in carefully scripted testimonies before parliamentary committees. The agency also enjoys significant exemptions from freedom of information legislation, and furthermore, doesn’t provide reasons for its decisions in a way that allows the public hold individual board members accountable for their views (one can contrast this to the Bank of Japan where individual board members’ votes are recorded).

Perhaps most troubling is the Reserve Bank’s budgetary processes, which are ‘off-the-books’ in the sense that the Bank just prints the money it needs to carry out its functions without needing to seek parliamentary authorisation for its spending. Although legislation does specify that the RBA is to return profits to the Treasury, the process is removed from other departments or agencies of the state.

How does the RBA justify its lack of accountability? The organization’s defenders have typically pointed to the doctrine of ‘central bank independence’ which rose to popularity in the 1990s. The doctrine aims to remove political considerations from central banking by insulating the technocrats at the RBA from transparency so they can carry out their work in the ‘best interests of the community’.

But a degree of latitude from intervention by politicians, while a noble objective, has become a code-word for secrecy. The need for free and frank discussion outside of the democratic realm is cited by central bankers as a reason for not releasing transcripts of the open market committee or for keeping hidden agreements with foreign central banks and governments.

This should be viewed as the self-serving tripe it is. The High Court as the nation’s highest court exercises equally important responsibilities yet its judges provide detailed reasons for their decisions so the public can hold them accountable for their views, and also has a budget authorized through the parliamentary process. It is doubtful that the RBA, as the custodian of the nation’s money supply, is so special that its individual board members should not have to justify every cash rate decision made.

In practice, the much vaunted ‘independence’ of the RBA is greatly exaggerated, so the doctrine of central bank independence fails to persuade in any case. Appointments to the board, which are made by the Treasurer, have been politicised, undermining its so-called independence. It makes sense that Treasurers would take into account more than just merit when making appointments: they are likely to select someone that already agrees with Cabinet’s own policy preferences. A blatant example of this was the appointment of Robert Gerard – a donor to the Liberal Party who had contributed $1 million to its coffers and was said to be a supporter of low interest rates – by Peter Costello.

The board itself is a coalition of vested interests populated with representatives from lobby groups and commercial entities who are heroically asked to set aside their sectional interests and prioritise the ‘public good’. The current board comprises powerbrokers with links to Walmart, Origin Energy and other major firms. Even the only academic member of the board, Professor John Edwards, was formerly employed by HSBC Bank and was an advisor to Prime Minister Paul Keating – a detail that would’ve been looked upon favourably by the Labor government that appointed him.

Consider also, that the RBA seems to accommodate its political masters through its reluctance to raise interest rates before elections. Ian McFarlane himself admitted in Australia’s Money Mandarins that "[the 2001 election] did have some small weight in our decision. If there was a really strong case to do something, we would always do it regardless of the election campaign. But it would have to be a pretty strong case". Since it gained ‘independence’, the Bank has only raised rates once before an election, and that was during the 2007 campaign.

It’s little wonder, then, that between 1991 and 2007 Australia was a high inflation country. Investor Chris Leithner points out that monetary aggregates rose at a rapid rate: M1 increased 404%, at an annualised compound rate of 10.2%. Naturally, this has significantly devalued the currency in Australians’ pockets and reduced standards of living – and all the while the Bank has continued to keep a lid on information that could be crucial in evaluating its performance.

Although it has been argued by central bankers that their role requires secrecy, they are overstating their case. To the contrary, when markets get more information, this can be expected to reduce uncertainty, bolster confidence and improve economic outcomes. Economic historian Robert Higgs, for instance, has shown how lack of investor knowledge about the government’s expected policy actions delayed recovery during the Great Depression. Similarly, studies have shown that greater transparency is often associated with less inflation variability.

A monetary system consistent with the rule of law – where accountability and transparency is the norm rather than the exception – demands opening up the books at the RBA. The public deserves to know.  

Sukrit Sabhlok is a Masters candidate at Monash University and editor of the Journal of Peace, Prosperity and Freedom

American Conversations Part I

Hopefully the punditry is wrong and descent into a Romanesque end isn't the final curtain call, writes Tim Humphries

It began with an interview I did with Libertarian radio host of the popular LRM.FM program Liberty Conspiracy with Gardner Goldsmith. The touchstones of North and South Korea plunged our cordial conversation into Trade, International Relations, Currency and the Economic drivers of same both at home and abroad.

The interlocking histories of Australian, American and Chinese involvement on the world stage also figured prominently. However what grabbed my attention was the idea that America was sliding from the world stage and that her pre-eminence was being usurped by China.

Competing academic debates and visions of Chinese Power in the 21st Century amount to precisely naught if we do not acknowledge the pivotal and relevant role China is playing. With American debts topping 1.17 trillion in November 2012 the question remains where to next for China's biggest customer?

The first instinct would be to answer "straight to the debt collection agency!". However there is a deeper issue at play. This relates not just to the reality of America, but America's vision of itself.

My thinking immediately returned to the question of pre-eminence and the potential for China to replace America as the dominant International hegemony within the next fifty years. Many analysts more experienced then yours truly would scoff at such suggestions. 

However all markers seem to indicate the inexorable rise of China will continue long into this decade and confirm the oft repeated and at times annoying Orwellian mantra that this is the "Asian Century".

Funnily enough as Gardner Goldsmith's North Eastern accent washed over the Skype line and explored the Libertarian angles around our discussion, I suddenly remembered the words of Clive James who said poignantly of America:

Shining because of its decay, ablaze with its consuming fires, a multiple injection of phosphorescent amphetamine's into a sky sick with brilliance, New York [America] is the world's most stunning proof that where there is light there is always darkness. And it's because the darkness runs so deep it burns so bright.

With such an image burned upon my literary retina, I suddenly realised the symbolic importance of my discussion with my New England friend.

Today's America is much like Times Square in New York City. Ablaze with financial, trade and strategic manoeuvres they flash across the screen and burn bright upon the International passersby.

America may seem powerful, however its debt ridden position is reducing that power to the residual glow that flickers and pulses from the decrepit media receptacles that spew forth the decaying and all consuming cultural fire that Clive Jame's words so brilliantly allude to. 

Hopefully the punditry is wrong and descent into a Romanesque end isn't the final curtain call.

Timothy W. Humphries is Assistant Managing Editor of Menzies House and writes from Brisbane, Queensland. 

See Clive James' Postcard of New York for more:



ALP’s knight is a thief in rusty armour

Niall Ferguson wrote in The Australian:


In the US GFC brings to mind the recipe for deep-fried chicken devised by Colonel Sanders. KFC stands for Kentucky Fried Chicken. Here, GFC should stand for Gillard's Fraudulent Claim.

The claim in question is that it was the fiscal stimulus injected by the Labor government that saved Australia from much more serious recession. According to one recent election ad, "Labor did what it had to do to avoid recession and protect jobs." The ABC's Kerry O'Brien unthinkingly recycles this line when asking Tony Abbott how he would have saved the 200,000 jobs Labor "created". It must have been music to Julia Gillard's ears when Nobel Prize-winning economist Joseph Stiglitz gave her his seal of approval recently. He praised the government's debt splurge as "one of the best-designed Keynesian stimulus packages of any country".


He goes on to say:


There's no denying the magnitude of the Australian handouts. If you rank developed countries' fiscal packages for the period 2008-2010, Australia's ranks third as a percentage of GDP, behind only the US and South Korea. So why did Australia's stimulus work so much better than America's? Spare us the fable that it was better designed. After the home insulation fiasco and the now-proven waste on new school halls, that can't withstand serious scrutiny.

Which brings me to problem two with the argument Labor saved Oz. Strangely, the professor (Joseph Stiglitz) has overlooked the other, more plausible explanations for Australia's relative outperformance. Step forward five candidates with a better claim to the credit: 1. Lady Luck 2. The Howard government 3. The RBA 4. China 5. The mining industry.


And concludes that:

Labor has stimulated the Australian economy, in the same way that Ned Kelly used to stimulate the economy of Victoria.

It's a very interesting article and if you get a chance I'd suggest reading the whole thing at The Australian.

(Posted by Chris Browne)

Fiscal Policy: Taxes vs Spending

A friend of mine recently linked to this Harvard study comparing the results between changing spending rates and changing taxation rates:

We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As forfiscal adjustments those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions. We confirm these results with simple regression analysis.

Worth a read if you need even further confirmation that cutting taxes and spending is the way to go! 

(Posted by TVA)

A million here, a billion there

Andy Semple has put together some images to clearly illustrate the state of Australia's finances that have resulted from the ALP's inability to manage finance and the economy.

A million here, a billion there. Pretty soon it starts to add up to some real money!

Below is one Billion US Dollars stacked on 12 standard pallets, altogether 10 million USD $100 notes. By Artist Michael Marcovici.


Here is a list of some of the biggest waste fro this government so far:

BER value rorted$6,000,000,000.00 

School Halls over budget$1,700,000,000.00 

School Computers over budget$1,200,000,000.00 

Medicare overspend$1,400,000,000.00 

Pharmaceutical overspend$1,800,000,000.00 

Solar Panel Overspend$850,000,000.00 

NBN Tender failure$17,000,000.00 


Stimulus Cheques wasted$40,000,000.00 

TV Station handout$250,000,000.00 

Grocery Watch$10,000,000.00 

NT Housing program$45,000,000.00 

2020 summit?$10,000,000.00 


Whaling Envoy$1,000,000.00 

418 media advisors$50,000,000.00 

Ambassador to Holy See$10,000,000.00 

Fuel Watch$8,500,000.00

That brings the total so far to (AUD):    $14,793,000,000.00

In US dollar terms the waste comes too USD $13,485,298,800 (using the current AUD-USD$ spot of 0.9116) or 160 pallets.


And as of 1:57pm on Wednesday August 4, 2010 our national debt stands at:


Click here for a live Australian National debt clock quote

Have you ever wondered what $94.5 billion dollars cash looks like?


And Julia Gillard wants to make the Economy front and centre of the Election?

That’s an economic record I’d want to ‘move forward’ from too.

Andy is the founder and Managing Director of Stockbroking firm ANDIKA and the co-founder and Managing Director of boutique Funds Manager Xcelerator Capital Limited. He blogs regularly at www.andylsemple.com